Does a slowing economy increase the risk of loan defaults in private debt?

Well-run private debt funds use rigorous scenario testing and real-time monitoring to mitigate risks. Historical net write-offs by banks peaked at just 0.68% during the GFC and were 0.04% in September 2024, demonstrating strong resilience across economic cycles.

Does a loan default always result in a credit loss?

No. Private debt investors are protected by their seniority in the capital structure. Senior debt holders get repaid first, before subordinated debt, preferred equity, and common shareholders. Covenants and controls act as early warning signals allowing lenders to engage with borrowers to mitigate financial loss.

Are all private debt managers the same?

No. Private debt managers differ significantly in scale, credit skills, and experience. Quality managers need sizable assets under management, bank-level credit skills, extensive networks, and the ability to directly originate and diversify loans across borrowers to achieve optimal outcomes.

Does commercial real estate debt put capital at risk in a property downturn?

Property owners face greater risk than lenders. With typical loan-to-value ratios of 60%, owners' equity acts as a buffer. Even if property values fall significantly, lenders can compel borrowers to restore their position or pursue asset sales to maximize recovery without necessarily incurring losses.

Are non-bank lenders lenders of last resort?

No. Competent private debt managers lend to quality companies and often compete with banks or work alongside them in lending syndicates. Post-GFC regulations requiring banks to hold more capital have created financing gaps that private debt fills for established companies with sound fundamentals.

Credit fund scores an upgrade

At least one listed credit fund has some good news to share with its investors. S&P Global Ratings has upgraded its rating of Metrics Credit Partners’ Diversified Australian Senior Loan Fund from BBB+ to A- with a stable outlook.

About 60 per cent of the money invested in Metrics’ ASX-listed MCP Master Income Trust is invested in the unlisted DASLF.

S&P affirmed DASLF’s short-term issuer rating of A-2, citing the fund’s “very strong risk-adjusted leverage and low underlying credit risk profile relative to peers and solid franchise among target investors.”

S&P said: “We consider the DASLF’s exposure to credit risk is low, relative to most of its rated peers. Since inception in June 2013, the fund has not experienced any material impairments in its portfolio, demonstrating sound underwriting across a portfolio that has lower underlying credit risk than it rates pers.”

DASLF is invested in a portfolio of Australian corporate loans and project finance. It does not invest in non-performing or distressed credit and has no derivative, hybrid or public bond exposures.

S&P said: “In our view, DASLF holds a unique position as the only fund in the market offering investors the ability to invest in Australian corporate debt across the credit spectrum.”

MCP Master Income Trust was listed in October 2017, with a target distribution rate of the RBA cash rate plus 3.25 per cent. According to its most recent fund report, it has maintained a spread of more than 4 per cent over the cash rate for the past year.

BANKING DAY – John Kavanagh / 02 April 2020

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